Monday, February 28, 2011

The Struggles of a Start-Up:

The Struggles of a Start-Up:

            Founded in 2007, provides funding for independent musicians to record albums by allowing listeners to preview the artists’ work and decide whether or not to invest.  It is very similar to the venture capital model used by many start up companies to fund their early efforts.  The company’s founders, Rocky Liu and Peter Wong, had even gone so far as to identify four distinct revenue streams for their business model.  The company had set a minimum target of $50,000 for musicians to raise before they could use the funds invested by listeners and fans to record an album.  As a fee for bringing together investors and musicians, would earn 33.3% of any future profits of the musician’s album sales. would also collect interest on the funds while not in use.  This could conceivably be a decent revenue stream as it would very likely take unknown musicians quite a while to generate the type of following necessary to raise $50,000.  The third stream was from a premium service that would allow users to interact with their favorite musicians through private chats on the site and receive a signed copy of the musician’s CD when it was produced.  Finally, like every other web-based company, would collect revenue from ads that site visitors clicked on by using Google Ads. 
The Good       
Liu and Wong were correct in identifying the music industry as an aging business model in need of a stark makeover.  The music industry’s core market has been selling albums in local record stores or other retailers.  However of the years leading up to 2007 when was founded, the music industry had seen digital media erode its core market at an increasing rate.  Record companies have long relied on album sales to offset the cost of identifying talent and producing albums.  When consumers purchase an album, they pay for the hits and the songs that are less known.  The less known songs help to subsidize the costs of production. However, by 2007 digital platforms had already been offering individual songs.  Now consumers were able to buy just the hits and record companies that had relied on lesser known songs to generate revenue were scrambling for new ideas.  Liu and Wong correctly identified an industry ripe for change as record companies were in a state of change.
The Bad
            While they were correct in identifying the music industry as ripe for change, Liu and Wong set out to identify revenue models for their service before determining if there was a market for their service and in doing so, missed the mark.  To be successful, a start-up must provide value for its costumer.  It must relieve some pain or stress for the costumer in such a way that the costumer recognizes the relief and is willing to pay for it.  Similar to, was created with the vision that its offerings would be highly desirable and that users would be attracted to the site in droves.  Unfortunately, very few individuals cared enough to participate in funding unknown musicians’ album productions.  The site failed to give users any incentive to invest their money in the future of unknown musicians.  True, 33.3% of album sales would be returned to investors but this was hardly motivation to invest hard earned money on the future of unknown musicians. only made the decision to invest more difficult by setting a target of $50,000 that had to be reached before an album could be recorded.  Even though that was the estimated cost to produce an album, users realized that it would take a very long time for musicians to raise that much money and then sell enough copies to cover the costs before they could recognize a profit on their investment.  In fact, making a profit was very unlikely. itself was also unknown to users.  In order for new users to become investors, they first had to trust to deliver the services they promised and then had to believe enough in an unknown musician’s future to fund his/ her album.  Overcoming one of these obstacles would be difficult but overcoming both on a shoestring budget would test the founders’ resolve.
The Ugly
            The struggles above were not the only ones faced by Liu and Wong.  To begin, the website itself was three months late in development and blew the budget by 40%.  Liu and Wong disagreed on why the effort was delayed, why it cost more than expected, and worst yet, the road ahead.  The road ahead was becoming much more difficult for because the delay in the development of the website allowed an unforeseen competitor to enter the market and drained the company of funds that it desperately needed to build brand awareness.  A Liu and Wong’s struggle to agree on a path ahead is not uncommon story for young start-ups but without quick resolution the business likely ceases to exist. 
What Now?
            Liu and Wong really have three options at this point.  First they can use the remaining $5,000 to invest in the website so as to attract and retain more users.  They have received feedback that the site is boring and does not hold visitors long enough to convert them to investors.  The second option is to redefine the market.  Most individuals are not interested in funding unknown musicians’ album expenses but record companies are very interested.  Liu and Wong could use the remaining $5,000 to tailor their offerings to create value for record companies.  Finally, Liu and Wong must consider shutting down.  They must consider all past efforts and costs as sunk and honestly evaluate’s ability to become a profitable enterprise at its current state. 
   does provide some value but its revenue model is misaligned.  The option to shut down cannot be recommended just yet.  Instead should redefine itself with its remaining capital in the mold of an Indy-rock Pandora.  Musicians have already happily uploaded their music to with the hope that someone will listen to it and enjoy it. can then categorize the content and stream it to visitors inserting short advertisements every few songs.  If applied a feature where users could “like” or “dislike” a song, the company could keep track of popular songs and bands which could be useful data to major record companies trying to identify new talent while reducing their search costs.  Record companies spend a lot of time and effort trying to identify the next big star. could provide a way for record companies replace their more capital intensive ways of identifying new talent by collecting data on popular songs and bands and packaging it record companies.
            When starting a business, either web-based or brick and mortar, great care must be taken to identify a source of pain or stress in people or business’s daily lives.  The pain or stress does not have to be physical, it could simply be “I do not like that my mail box does not lock because I think people will read my mail.”  Relieving the pain or stress is how a start-up can provide value and charge for its services. created a fun idea but it did not solve a problem for anyone.  Nobody wakes up in a cold sweat in the middle of the night wondering if they forgot to help fund an unknown musician produce an album. still has time to modify its website and offerings so that it can provide value to a different market.  However, with feuding partners and only $5,000 left, time is running out.

Monday, February 14, 2011

Netflix: The Video On Demand Decision

Founded in 1997, Netflix has succeeded by delivering movies to customers with greater value, convenience, and selection than brick and mortar competitors.  Netflix has effectively merged new and old technologies to create a customer experience that has crippled many traditional competitors.  The company has developed an advanced set of algorithms that predict what movies users will like based on past reviews and similar patterns of other users and married that with the distribution system of the USPS.   The combined model enables Netflix to service more users with fewer copies of movies.  However, by 2007, video on demand was becoming more of legitimate means of distributing content.  Netflix would have to determine whether to enter the new market and potentially risk cannibalizing its DVD by mail business or not enter and risk losing margins to cable providers or other video on demand providers.
            The decision to enter is the easy part, Netflix must enter the market.  In keeping with the company’s value proposition, Netflix delivers greater value, convenience, and selection.  In 2007, greater convenience will soon mean no longer having to wait even a day to watch a movie.  Netflix must enter the video on demand market to retain its position as a leader in providing convenient access to movies.  The real question is how to enter.  Netflix can partner with a cable company as they already have access to a viewer’s tv.  It can spin off a company to compete in the video on demand market to keep the businesses clearly separate and protect Netflix from piracy in the video on demand market.  Or Netflix could dive head first to the video on demand market and use its advanced selection tool as a key differentiator in the new market.
            While the answer is obvious now (Netflix entered the video on demand market on its own), in early 2007 the path ahead was not as clear.  However, the choice of competing on its own was the choice with the least risk.  Partnering with local cable providers would not have yielded any significant long term advantage to Netflix.  The company would have most likely offered its algorithms to cable providers to enable their subscribers to select movies.  This would have provided Netflix a revenue stream in the way of licensing fees but also open some of its proprietary data to partners.  Additionally, cable providers are local.  Netflix would have to have hundreds of partnerships to compete in the video on demand market this way.  It is too costly and too risky to form and manage that many partnerships so that option should not be pursued.   
Similarly, spinning off a separate business is also too costly and too risky.  Costs are in the form of talent in this instance because Netflix would have to part with some of its top management to ensure the spin-off’s success.  It would likely need to jumpstart the new entity with seed money as well.  Worse yet, if the newly formed business took off it would prove to be a competitor with Netflix.  The risk of Netflix customers leaving in mass for a new video on demand provider is real and likely.  Spinning off a new company to enter this market only hastens the parent company’s demise.
Netflix must compete in the new market on its own.  It must protect its key asset and competitive advantage, the algorithms that recommend movies further down the long tail of its inventory.  Risking that technology in any partnership will likely hinder the company’s ability to retain its market leading position. 
Netflix must adapt and enter the video on demand market and be prepared to enter whatever markets come next as well.

Monday, February 7, 2011

Why Can’t Yelp Make a Profit?

Why Can’t Yelp Make a Profit?
The Problem
In a word: Revenue!  But it’s not quite that simple.  Yelp cannot figure out how to charge for the content that its community of reviewers generate on a daily basis.  The company was founded in 2004 to answer the question of what to expect at local businesses before you shopped there.  Need a good doctor or want some great barbeque, go to Yelp and see what your neighbors recommend.  The company offers users the ability to post reviews on anything and everything and presents all the reviews for a specific business in just a few clicks.  The ever increasing number of reviews requires more and more capacity on a daily basis to keep up.  The company originally relied on venture capital to develop its platform and then sustain its growth from the San Francisco area across the country but with competitors like Google HotPot and Yahoo! Local, Yelp needs to carve out a profitable niche fast or risk being driven out of the marketplace.
At the root of the problem is Yelp’s business plan, or lack of one.  The company originally set out under the old internet startup mantra “build a following online and money will follow”.  Well, Yelp built a huge following but the money hasn’t followed.  The company did not have a clearly defined plan to charge to make the company profitable.  Fast forward through several years of failed revenue generating concepts and Yelp is still struggling to turn a profit with its current business model.  Yelp needs to change its model fast.
Stop Giving Away the Cow
As the old saying goes, why buy the cow when you can have the milk for free?  Yelp has provided a free means of advertising for many local businesses by publishing unsolicited and unedited user reviews.  Many businesses have seen the impact of Yelp reviews on sales firsthand but yet few expressed interest in Yelp’s sponsorship program which provided businesses the opportunity to post information and pictures on its Yelp page for a fee.  And why should they?  Yelp’s sponsorship program did not deliver enough additional value to a business owner to justify the fee.  A few good reviews are much more valuable to a business than a few nice pictures of its dining area.  If a business can continue to enjoy free positive reviews on Yelp, why pay?  Interest in the program may have been higher if Yelp had allowed businesses that received negative reviews the opportunity to edit or delete them but Yelp categorically denied that.  To make the model a cash cow instead of the free cow, Yelp needs to leverage the power of its reviewer community and use it make money by blocking content.  Yelp can continue to allow reviewers to post reviews on any business they want but only publish reviews on businesses who pay a subscription fee.  If a local business owner wants potential customers to read his/ her reviews on Yelp, they will have to pay a monthly service fee for Yelp to publish the content.  Businesses, especially local ones, recognize the influence that Yelp has in generating new customers and often times do not have the resources to take out an ad in the Yellow Pages or other media.  Yelp has offered business owners a viable alternative to the Yellow Pages and has proven its ability to influence sales.  Charging a fee for public distribution of its reviews like Zagat is not unreasonable, especially when many would likely notice a drop in new customers if Yelp blocked their review page. 
You Scratch My Back, I’ll Scratch Yours
The Yelp management team has expressed concern that charging for access to reviews would alienate some reviewers and so access is still free.  In January of 2009, Yelp boasted over 22 million unique visitors but less than 1% of those visitors posted a review1.  While it is likely that many visitors had previously posted reviews or will post reviews in the future, there still exists a significant population of passive viewers who have not and will not post reviews.  These passive reviewers benefit from the information that Yelp provides through its network of reviewers but does not offer anything in return and in fact cost the company money by requiring greater servers and capacity to accommodate the traffic.   Yelp can implement a review to read model in which it would allow free access to its reviews if you have posted a review in the past 30 days and charge a subscription fee to just read its content.  Sites like Angie’s List already use a similar model but do not provide an option for free access.  Implementing this would not be difficult as Yelp reviewers already have profiles.  The company can track posts associated to profiles so that the reviewer would not have to do anything different.  This would encourage more passive users to become active members of the reviewing community and give Yelp more power with advertisers and local business owners in its cash cow model outlined above.  If Yelp’s passive users do not want to become reviewers, the company can charge a small fee for access to its content.  Yelp must not overprice its content for risk of reducing the number of unique visitors and more importantly its reviewers but even $1 a week for passive use would have a significant impact on revenue.  By pricing access to reviews very low and providing options to free content will mitigate Yelp management’s concern of alienating reviewers.
Time is Running Out!
Yelp needs to take action immediately because it does not offer a unique service.  Sites like Yahoo! Local, Google HotPot, and Angie’s list offer very similar services.  Yelp needs to capitalize on its reviewer community now before reviewers begin to migrate to different sites.  Reviewers identify with other Yelp reviewers, the website, and the company itself but competitors can create similar communities too.  Yelp must act soon or risk while it still has the community of reviewers to leverage.  The clock is ticking.
1.  Piskoroski, Mikolaj Jan.  “Yelp,” Harvard Business School, March 27, 2009.

Tuesday, February 1, 2011

Why Did Webvan Fail So Spectacularly?

Why did Webvan fail so spectacularly?

Webvan was established in 1997 to allow consumers to order groceries online and have them delivered to their home within a 30 minute window.  It attracted hundreds of millions of dollars in venture capital and hundreds of millions more in a 1999 IPO because investors believed that the company could use online grocery sales as a spring board into other business lines.  The high priced, well-decorated management team at Webvan wooed investors with promise of solving the “last mile” problem, how to bring goods directly into customers’ homes profitably.  Why this group of top-talent executives believed they could not only solve the near mythical problem that has long plagued retailers but also solve it on a scale large enough to service markets all over the county in two years is beyond me.  Webvan might have been successful if it had attempted to service one market efficiently and then expand into a new market using the knowledge gained by efficiently serving the first.  Instead, Webvan built a complex distribution center that management believed was capable of being replicated quickly in many new markets.  Besides investing hundreds of millions of dollars to support a market that did not yet exist, three fatal errors doomed the company’s model.

Allocating resources:

Webvan created its distribution center around a maze of conveyor belts, scanners, and picking stations.  Each new distribution center costs $35 million just to build.  Stocking the center and marketing the company’s service in a new market, and staffing added to that total.  A significant part of that cost was tied to the elaborate carrousels that Webvan kept its products in.  The carrousels rotated products around the employees so that they could remain stationary and fill orders faster.  However, this technology only helped fill about 35% of Webvan’s orders because it could not store produce of frozen goods, the remaining 65% of ordered still required employees to manually select products.  The investment in the carrousels and the technology to make them work failed to create as much of a cost savings as management had envisioned. 

The Market:

Another obstacle was delivery density.  Webvan needed 10-12% of total households to be repeat customers for its model to be profitable.  In 1999, that might have been a half to two-thirds of the tech-savvy households in the region.  If all of those households were clustered together in one or two neighborhoods, Webvan could have serviced them with a significantly less capital intensive model.  Perhaps a smaller, more centrally located (with respect to customers) distribution center with only a small fleet of vans.  Unfortunately for Webvan, in 1999 the tech-savvy households that they needed to count as repeat customers were scattered all over major urban/ suburban areas and required a massive operation to provide the level of service that Webvan claimed to be provide.

Too Smart for Their Own Good:

Webvan assembled a who’s who list of top talent executives.  They created data and models that supported their own beliefs and when analysts and investors voiced concerns about Webvan’s assumptions, management just shrugged it off.  The Founder, Louis Borders proclaimed “Its $10 billion or zero” and CEO George Shaheen believed that Webvan would be more than groceries and that the market was $1.5 trillion (total projected online purchases for 2003 by IDC) not $6.5 billion projected for online grocery sales by Jupiter Communications for the same year.  What is truly amazing is not so much the projectitis that this group contracted but that so many analysts and investors were sipping the Kool-Aid too.  It’s not uncommon for managers to get so far caught up in their own ideas that they fail recognize what’s actually occurring in the market but this was star-studded management team who had been there, done that, and knew to question every assumption relentlessly to be sure that it was reasonable.  Unfortunately, this management team believed that they were different.  They had the best minds and the best technology available.  They believed their solution was better than everyone else’s who had tried and failed to solve the “last mile” problem before them.  They casually shrugged off conflicting data and ignored analysts’ concerns to their own detriment.  In the end, I suppose that if you are going to fail, you might as well be the best at that too.